Capital Markets

The rise of the surveillance state and the shifts in our daily usage of portable personal computers (smartphones) are likely to lead to some intriguing shifts in how we communicate and invest.

Kate and William had a boy. Our bet on a name is George, but only because that appears to be the odds-on favorite among the London bookies.  Still, all that money flowing around must at least be a little “Smart”, right?  But as ConvergEx's Nick Colas notes, the same dynamic applies, albeit on a larger and hopefully more informed scale, when it comes to how capital markets price securities.  We have our baselines – the price-earnings ratio of the market, the interest rate on Treasuries, the average price per square foot for real estate, and so forth – and then we tweak everything else up or down from there.  That method has the benefit of simplicity, but comes with problems as well.  More than anything, Colas warns, it pushes investors to “Anchor” their notions of valuation to benchmarks which may move when the wind shifts.

Surplus capital used to be the understood as the primary challenge, but this fell out of favor.  This essay seeks to return it to the center of the narrative.  

Financial asset investors may continue to benefit in the short term while stocks and bonds remain well bid, but production and labor in over-levered economies should continue to wither. When we take it to its logical conclusion, central banks cannot withdraw debt support (on a net basis) and so our baseless currencies seem highly likely to fail to provide sustainable purchasing power. (This happens as producers demand more currency units for their labor and resources, not when consumers drive prices higher by competing with each other for finite supplies of labor and resources.) Continued inflation of all global currency stocks is likely. This implies to us that fundamental expectations of the inevitability of price inflation across borders and in all currencies must change, from unlikely to highly likely. Since very few investors expect rising inflation anytime soon, the return skew is overwhelmingly positive in its favor.

Overview of the investment climate.  

In the classic fantasy rom-com The Princess Bride, the beautiful maid Buttercup orders the farm boy Westley to perform numerous tasks to test his servitude. No matter the magnitude of the request, Westley simply answers "As you wish" and makes it so. Buttercup eventually comes to view Wesley with similar devotion, and true love is born. Similarly, investors have fallen back in love with the capital markets, whose continual response their increasingly irrational hopes has been "As you wish." It's inconceivable!

Larry Summers has been failing up since he entered the public sphere. The reults have been catastrophic for many main street Americans.

When it comes to economic data, in China whatever the Politburo's Goalseek.xls model says is what goes, and credibility - especially in the context of a historic CNY1 trillion deleveraging - is irrelevant. But one reason why today's GDP print is even more irrelevant than ever, is becuase as Xia Bin, an economist with the State Council's Development Research Center and government advisor, said "Arguments about whether China will grow at 7% or 7.5% are "pointless" because the economy is already in a financial crisis which may only worsen if the government doesn't address the country's crippling debt problem."

Dispassionate review of some of next weeks important developments.

No, last week’s jobs report was not “strong”. It was just another edition of the “born again” jobs scam that has been fueling the illusion of recovery during the entire post-crisis Bernanke Bubble. In short, the US economy is failing and the welfare state safety net is exploding. And that means that the true headwind in front of the allegedly “cheap” stock market is an insuperable fiscal crisis that will bring steadily higher taxes, lower spending and a gale-force of permanent anti-Keynesian austerity in the GDP accounts. And for that reason, the Fed’s strategy of printing money until the jobs market has returned to effective “full employment” is completely lunatic. The bottom-line is that Bernanke is printing money so that Uncle Sam can keep massively borrowing, and thereby fund a simulacrum of job growth in the HES Complex. Call it the Bed Pan Economy. When it finally crashes, Ben Bernanke will be more reviled than Herbert Hoover. And deservedly so.

Why has there been no recovery? Why has the “stimuli” failed so miserably? Why won`t trillions of currency units move the economy into escape velocity? Well, if you have spent the last thirty years consuming your hard earned capital and depleted the pool of real savings there is only one thing to do! Produce more than you consume and save the difference!

Whether or not you believe PMs will serve as the ultimate store of wealth as the global fiat monetary system collapses should have absolutely no bearing on making the intelligent decision to remove your financial assets from under the domain and inevitable confiscation of global bankers and their State-run tyrannies.  Independence Day is a fine day to start the process of taking back our freedoms from the tyrants that rule over us.

The price of gold fell last week to the $1,200 level. The lemming sentiment in capital markets is uniformly bearish, yet every price-drop brings forth hungry buyers for physical gold from all over the world. Even hard-bitten gold bugs in the West are shaken and frightened to call a bottom, yet it is these conditions that accompany a selling climax. This article concludes there is a high possibility that gold will go sharply higher from here. There are three loose ends to consider: valuation, economic and market fundamentals.

That a BitCoin-based ETF is a horrible idea for those who believe in what BitCoin stands for, i.e., a status-quo regime-remote monetary process which is naturally also independent of existing capital markets, is quite clear. Yet a BitCoin-based ETF prospectus, namely the Winklevoss BitCoin Trust, with a proposed offering of 1 million shares at a price of $20 each, is precisely what the Winklevi filed today with the SEC. We can only assume this idiotic idea is proposed simply to entice the habitual gambling momentum-chasers, who seek a conventional method of pursuing the momentous volatility that only Bitcoin can offer now that regular BitCoin exchanges are being shut down by the US and other governments, as absolutely nobody else would be interested. That, or just another expression of the identical twins' megalomania who enjoy nothing more than seeing their name in lights or in the title of a security. Because once one reads the risk factors, among which we find the following, we doubt even said habitual gamblers will be interested: "It may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more countries, and ownership of, holding or trading in Shares may also be considered illegal and subject to sanction." Well, you have been warned.

• Here come the rolling blackouts: Obama takes on power plant emissions as part of climate plan (Reuters)
• Walking Back Bernanke Wished on Too Much Information (BBG)
• As previewed last week: Bridgewater "All Weather" is Mostly Cloudy, down 8% YTD (Reuters)
• U.S. Said to Explore Possible China Role in Snowden Leaks (BBG)
• Coeure Says No Doubt ECB Loose Monetary Policy Exit Distant (Bloomberg)... so a "recovery", but not at all
• U.S. steps up pressure on Russia as Snowden stays free (Reuters)
• Texas' Next Big Oil Rush: New Pipelines Ferrying Landlocked Crude Expected to Boost Gulf Coast Refiners (WSJ)
• Singapore Offsets Bankers as Vacancies Fall (BBG)
• Asian Stocks Fall as China Sinks Deeper Into Bear Market (BBG), European Stocks Rally With Bonds as Metals Advance (BBG)
• Qatar emir hands power to son, no word on prime minister (Reuters)